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What is a Shareholder Agreement?

BySammi Caramela,
business.com writer
|
Apr 20, 2018
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> Business Basics
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With a shareholders' agreement, your corporation can avoid legal issues and challenges.

When you run a business with multiple shareholders, like a C-corp or S-corp, there are bound to be differences among company owners. It's only natural that you'll disagree on certain points, some more critical than others. But with a shareholders' agreement, you can each compromise and confront impending concerns.

"Every shareholder has their own vision for what the company should be," said Nate Masterson, marketing manager for Maple Holistics. "While more often than not there's a lot of crossovers, on occasion, there will be points of disagreements that are untenable. Having a shareholders' agreement can prevent a shareholder from enforcing their will in a destructive manner, regardless of how the other shareholders feel."

While you are not obliged to create a shareholders' agreement, doing so will prevent potential legal issues down the line. Here's how to create your agreement, and what to include.

What is a shareholder agreement?

According to Investopedia, a shareholders' agreement is "an arrangement among a company's shareholders that describes how the company should be operated and outlines shareholders' rights and obligations."

The agreement, not to be confused with articles of incorporation, is an informal document that is created and settled by all shareholders. It helps ease the process of many business resolutions, like removing a shareholder or selling or purchasing shares. Without an agreement, shareholders won't have a compromised set of guidelines or rights, which can lead to conflict and one-sided decisions.

Reaching a consensus

It can be difficult for everyone to agree, especially if you have numerous shareholders. But it's imperative to work out all the details and kinks before signing your business agreement. If your terms aren't settling well with the other shareholders, reconsider your position, said Masterson.

"You should always be prepared to leave the negotiation table if certain conditions aren't met," he added. "It's very important that everyone is on the same page before an agreement is signed."

To ensure you're on the right track with the agreement, consider hiring legal help. That way, you won't be misrepresented or underrepresented.

"When signing a contract that requires conduct from you, it’s imperative that you seek legal counsel if only to make sure you can or want to comply," said Masterson.

What to include

There are many points to cover in your shareholder agreement. This varies depending on the corporation and shareholders involved. Masterson outlined a few provisions that are necessary:

  • The right to remove directors
  • Terms that protect minority shareholders
  • Restrictions on how and when someone can dispose of their shares
  • Limitations on the actions a director can take
  • A business plan that ensures that all shareholders are sharing the same vision
  • Steps on how to resolve shareholder disputes

He also noted two significant clauses: The Right of First Refusal, which ensures new stocks will be offered to the minority shareholders first; and Piggyback Rights, which gives minority shareholders the right to be included when majority shareholders sell stock.

Additionally, it's important to protect intellectual property when drafting your agreement. This acts as copyright for any creative manuscripts or ideas belong to the individual who invented them, rather than the corporation as a whole.

There is no right or wrong when deciding what to include in your business agreement. As long as everyone is on the same page and fairly represented, and critical points are covered, there shouldn't be any issues.

Sammi Caramela
Sammi Caramela
See Sammi Caramela's Profile
Sammi Caramela has always loved words. When she isn't working as a Business.com and Business News Daily staff writer, she's writing (and furiously editing) her first novel, reading a YA book with a third cup of coffee, or attending local pop-punk concerts. Sammi loves hearing from readers - so don't hesitate to reach out! Check out her short stories in Night Light: Haunted Tales of Terror, which is sold on Amazon.
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